This new study may help to explain the phenomenon of rogue traders with an appetite for risk, whose behaviour has traditionally been blamed on management oversights and regulatory pitfalls
“Rogue Traders may display ‘risk blindness’,” says Lecturer, Dr Elise Payzan-LeNestour at the UNSW Business School. “The new current study may help to explain the phenomenon of rogue traders with an appetite for risk, whose behaviour has traditionally been blamed on management oversights and regulatory pitfalls.”
UNSW researchers have for the first time shown that prolonged exposure to extreme volatility in financial markets may distort a trader’s perception of risk, making them potentially blind to high levels of risk.
The findings have wide-reaching implications for the business community and present a fundamental challenge for economic theory and practice.
The research, published in the journal Current Biology, was a collaboration between researchers from UNSW’s School of Psychology, UNSW Business School and the Swiss Finance Institute at the University of Geneva.
Study first author and UNSW Business School Senior Lecturer, Dr Elise Payzan-LeNestour, said “our findings point to a complementary root cause, namely an adaptation to chronically high levels of risk and possible ‘risk blindness’.”
She says in economics, decision-making requires an accurate representation of risk with the focus more on the choice of whether to accept a risky investment rather than the assessment of risk, or ‘perception’.
However, humans often perceive their physical environment incorrectly. The most striking of such misrepresentations is known as a sensory after-effect. For instance, after viewing the downward motion of a waterfall, it can appear the rocks to the side of the waterfall are moving upwards when in reality they are static.
Researchers decided to investigate whether they distort how humans perceive variance in financial markets. To measure this, the researchers devised several techniques to control the nature and degree of variance across different visual representations.
An earlier study by Dr Payzan-LeNestour and colleagues found such after-effects are evident in investors’ perception of S&P 500 volatility and cause significant distortions of S&P 500 options prices.
Dr Payzan-LeNestour will discuss how humans are hardwired to repeatedly gamble and how greediness is inherent in the way our brain works at the 7th annual TEDx Sydney event will be held at Sydney Opera House on Wednesday 25th May 2016.
For further comment call Elise Payzan-LeNestour on 02 9385 4273
Media contacts:
Julian Lorkin: 02 9385 9887 | 0405 805 365 |
Dan Wheelahan: 0435 930 465 |